Does an unexpected car or home repair blow your monthly budget? Do you feel like you’re never able to save enough for a vacation? Do you worry about if you’re going to have enough for retirement but you don’t even know what you have?
If the answer is yes to any of these questions, you could benefit from a simpler way to manage cash flow.
I believe creating a budget and a solid cash flow management system is one of the most important concepts that today’s population needs to understand and use.
Not only does it help create the framework around which money decisions should be made during one’s lifetime, but it also creates the knowledge to help one adequately plan and prepare for the future—whether that be proactively planning for a short-term goal or more commonly, planning for retirement.
Cash flow strategies and Finance 101 classes are generally not taught in today’s middle schools, high schools or even qualified higher education institutions (unless of course one happens to be majoring in Finance or Economics). Often times, cash flow management is learned from those closest to us, which can be good or bad, depending on each unique situation.
At Birchwood Financial Partners, all of our Certified Financial Planner™ professionals use what we like to call “bucketing strategies”. We’ve found a great deal of success in helping build cash flow systems that mimic a flow of money into several different categories or buckets. Many of our clients have also helped their children by teaching similar strategies in hopes it helps to pave the way for successful money management skills during adulthood.
Consider the following Bucket Budgeting System:
Bucket 1 – The primary checking accountThis is the account from which all bills will be paid. When possible, we encourage setting up automatic bill pay for all of the recurring monthly expenses such as mortgage or rent payments, cable, phone, insurance, utilities, etc. Generally speaking, most individuals know what these bills will be each month and therefore know how much cash should be reserved in this bucket to cover a full month worth of payments. Once this fixed dollar amount is set aside and reserved within this bucket, we encourage clients to shift remaining assets into additional buckets.
Bucket 2 – Add to savings and investmentsBefore paying yourself or making discretionary purchases, we encourage clients to proactively set aside money for future goals. While we refer to this as “Bucket 2”, it may actually consist of several different buckets that are funded on an ongoing monthly basis, such as: IRA’s, Roth IRA’s, 529 plans, non-qualified accounts, emergency savings, etc. Fundamentally, we encourage clients to save for future goals before moving money into the discretionary spending bucket.
Bucket 3 – The discretionary spending bucket
This can be a separate checking account or a cash system that individuals use for personal and/or household spending purposes. In my household, this is the golf, softball, travel, and “don’t ask” bucket. It seems to work well for my wife and I since we know that we’ve already set aside money for our ongoing lifestyle needs and savings for future goals. When we look at the money we have reserved in this bucket, we get to make individualized choices to spend money on things that make us both happy.
There’s no one size fits all approach to cash flow management and budgeting. Every situation is different and a case can be made for using online budgeting tools or a personalized spreadsheet. The main variable that drives a successful system, is being proactive and honest about what the objectives of the budgeting process are.
At Birchwood Financial Partners, many of our clients manage cash flow and budgeting themselves, but for those who want more support, we help design a system that works for them. Helping to plan for the future without necessarily giving up on today’s enjoyment. If you or anyone you know is interested in learning more about how a bucketing system may improve your cash flow management, we encourage you to reach out to one of our Financial Advisors.